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Farm Business Financial Plan

A Farm Financial Plan is a comprehensive document that outlines the financial strategy and requirements for operating a farming enterprise. It includes several components:

1. A description of the funding requirements of the farm business: The plan specifies the capital needed to start or continue farming operations, covering costs for equipment, land, labor, and materials (such as seeds, fertilizers, etc.) to manage day-to-day expenses.
2. Provides detailed information on break-even analysis: It assesses the minimum level of production or sales required to cover all fixed and variable costs, helping to identify the point at which the farm will start generating profits.
3. Projected income statements, cash flow, & balance sheets: These financial statements forecast the farm's future performance:
   • Income statements show projected revenues, expenses, and profits over a given period.
     • For an income statement example, click here.
   • Cash flow statements track the movement of cash in and out of the farm, ensuring sufficient funds are available to meet operational needs.
     • For a cash flow statement example, click here.
   • Balance sheets provide a snapshot of the farm’s assets, liabilities, and equity at a specific point in time, helping to assess financial health and stability.
     • For a balance sheet example, click here.

• Determining funding Requirements

  Funding will be determined by the following:

  • Investment costs (establishment costs): how much you need to invest to get your business started.
    • Please see these establishment costs of avocados in South Florida as an example: https://edis.ifas.ufl.edu/publication/FE956
  • Operational costs: annual costs to run your business.
  • Financial necessities: money you need to keep your business going.
  • Sales plan: the amount of product you will need to sell to cover your costs.
• Farm Assets

  The assets of a farm business are valuable resources used to operate and grow the farm. They can be divided into two main categories:

  1. Current Assets (short-term): These are assets that are expected to be converted into cash or used up within a year. They include:
     • Cash and cash equivalents: Money available for use.
     • Accounts receivable: Money owed by customers.
     • Inventory: Crops, livestock, feed, seeds, fertilizer, etc.
     • Prepaid expenses: Payments made in advance for future services.
  2. Non-Current Assets (long-term): These are long-term assets that the farm intends to use for more than one year and are essential for the farm's operations. They include:
     • Land: Property used for the farming business.
     • Buildings and structures: Barns, silos, greenhouses.
     • Machinery and equipment: Tractors, plows, harvesters.
     • Reproductive Livestock: Animals raised for breeding.
     • Vehicles: Trucks and trailers for transportation.
     • Improvements and infrastructure: Fencing, irrigation systems, etc.
• Farm Liabilities

  Farm liabilities are the financial obligations or debts that a farm business owes to others. They are classified into two main types:

  1. Current Liabilities (short-term): These are debts that need to be paid within a year, such as:
     • Accounts payable: Money owed to suppliers for goods or services received.
     • Short-term loans: Loans due within the year, such as operating loans.
     • Accrued expenses: Unpaid expenses like wages, taxes, or interest.
  2. Non-Current Liabilities (long-term): These are debts with a repayment period longer than one year, including:
     • Long-term loans: Loans for equipment, land, or buildings with a repayment term of more than one year.
     • Mortgage debt: Loans secured by the farm's land or property.
     • Lease obligations: Long-term rental agreements for equipment or property.
• Financial Analysis

  The following formulas can help you determine the budget of your farm:

  • Return on Investment (ROI): calculated by dividing the profit earned on an investment by the cost of that investment. For instance, an investment with a profit of $100 and a cost of $100 would have an ROI of 1, or 100%, when expressed as a percentage.
    • 5% is good for agriculture
    • FORMULA:
      

  • Return on Assets (ROA): Adding net farm income (total income minus costs) plus interest expense minus any unpaid labor or management and dividing that total by assets.
    • 3% average in farming
    • FORMULA:
      
  • Break-even Ratio: Percentage of income needed to break even, i.e. for costs to equal expenses.
    • FORMULA:
      

  • Debt-to-Equity Ratio: Shows how much debt a company has compared to its assets.
    • Less than one to be solvent (can pay off all your debts if you sold everything)
    • A good ratio is 0.5
    • FORMULA:
      

  • Benefit-Cost Ratio: Determined by dividing the proposed total cash benefit of a project by the proposed total cash cost of the project.
    • It needs to be greater than 1 to be profitable.
    • FORMULA:
      

  • Net Present Value: For long-term investments calculated over time with a discount rate (usually 5% or the interest rate).
    • This determines how long it will take to get what you invest back.
    • Important in long-term investments like orchards.
    • FORMULA:
      

For more information about specific crop budgets, visit the UF/IFAS website “Food and Resource Economics Department: Commodity Production Budgets”.